The goods trade deficit touched USD 18.0bn in July 2018, advancing both month-on-month (17.1bn in June 2018) and year-on-year (USD 11.4bn in July 2017). This month-on-month (MoM) deterioration was driven by the sharper decline in exports vs. imports. While the import growth (29 per cent YoY) stood almost 2x of the export growth (14.3 per cent YoY), imports of gold and pearls, precious & semiprecious stones, which had been declining since September 2017 posted positive growth in July 2018. On a fiscal year-to-date (FYTD) basis, the trade deficit has touched USD 63 billion vs. USD 51 billion last year. FYTD, the export growth of 14 per cent YoY (vs. 4 per cent last year), has been driven by petroleum products (51 per cent YoY; 15 per cent share) and engineering goods (25 per cent share; 14 per cent YoY). However, the contraction in two of the major exports -- gems & jewellery (-1 per cent YoY), and readymade garments (-14 per cent YoY) is worrisome. The FYTD imports growth of 16 per cent YoY has been largely induced by petroleum, oil and lubricants (POL) products (27 per cent share; 53 per cent YoY), electronic goods (12 per cent share; 12 per cent YoY), and coal, coke & briquettes (5 per cent share; 24 per cent YoY). However, this growth has been restrained by the FYTD contraction in large import items such as pearls, precious & semiprecious stones (-23 per cent YoY; 6 per cent share); gold (-15 per cent YoY; 7 per cent share), and transport equipment (-25 per cent YoY; 3 per cent share). Consequently, although the trade deficit excluding gold & oil imports is still negative, it has halved vs. FYTD18.

Services surplus up to Q1FY19 expands 10% YoY

The services surplus in June 2018 expanded 11 per cent YoY to USD 6.6 billion; (vs. USD 6.0 billion in May 2018).The FYTD19 services surplus now stands at USD 19 billion; registering a 10 per cent YoY growth. Growth in imports (41 per cent YoY) overshadowed export growth of 27 per cent YoY.

Is the depreciating rupee aiding exports?

The rupee on August 14, 2018, touched an all-time low of Rs 70/USD on the back of strengthening of the dollar. During the taper tantrum (May-October 2013) when the rupee hit new lows, export growth in textiles (including readymade garments), engineering goods, and leather manufactures made significant gains. However, the current phase of depreciating rupee hasn’t provided a material boost to our exports yet, although it seems to have enabled recovery of the negative growth in gems & jewellery and readymade garments.

Can the crisis in Turkey create trouble for Indian exports?

Turkey is not a key trading partner for India, i.e. in CY17, only 0.25 per cent of total imports were sourced from Turkey and it formed the destination for merely 1.7 per cent of our exports. However, a closer scrutiny reveals that 1/4th of India’s exports to the world for manmade staple fibre & filaments, and plastics & thereof, are destined to Turkey, in addition to the fact that India is among the top 10 supplying nations for the same to Turkey. Hence, the instability in Turkey may impact the export of these products, even as the impact on trade balance is likely to be insignificant.

What does Iran, China & the US hold for our trade balance?

Recent developments in the US-China trade war have offered some relief to India’s trade front moderation in oil prices on the fear of decline in oil demand and opportunity to expand exports (agri-related- rice, soyabean, machinery/apparatus) to China. In July 2017, India was reported to export rice to China for the first time. There is still time for India to potentially reap the opportunity for export expansion to China.

Source: JM Financial